Robinhood's Plan to Win the Crypto Exchange War? Kill Trading Fees

As a new entrant into the cryptocurrency field, Vlad Tenev, co-CEO of online investment brokerage Robinhood, is following a time-honored business strategy: Undercut the competition.

Except he's taking it to an extreme.

Launched early this year, Robinhood Crypto is differentiating itself with zero-fee transactions, with the ultimate goal of doing away with the concept of trading fees in the market altogether.

Framing this effort as a force for good in line with his company's namesake folk hero, Tenev told CoinDesk he wanted to prevent consumers looking to invest in cryptocurrencies, especially young millennials, from getting "ripped off with 4 to 5 percent transaction fees" on "sketchy foreign exchanges."

And while offering zero-cost trades to consumers may give Robinhood an edge right now, in his mind, it's only a matter of time before this becomes commonplace.

"Some people just are comfortable with the old ways but that's becoming less and less over time. I think with transaction fee-based trading you'll have the same story," he said, adding:

"Over the next couple of years, the vast majority of people that are interested in these services will begin to understand that you're not getting much from paying those fees."

The fee-free business model has already served Robinhood well in its flagship business, Robinhood Financial. Founded in 2013, the company originally dealt in traditional investment products such as stocks and options, competing with discount brokerages like E-Trade and Charles Schwab.

From the outset, and continuing to this day, Robinhood offered these services on a no-commission basis.

Instead, the company primarily makes its profits through collecting interest on cash and securities held in customers' accounts, as well as through optional premium account memberships such as Robinhood Gold. It currently services over 5 million consumers and has contributed mightily to a pricing war among brokerages that has reportedly driven incumbents' fees down nearly 40 percent.

In crypto, however, it's unclear how Robinhood intends to make money over the long term.

For now, the company is treating this activity as a way to get consumers to open accounts that will hopefully benefit its core business. "The primary goal of the crypto business is to just get people into the overall ecosystem so we're intending to break even on that business for the foreseeable future," Tenev said at a recent conference in New York.

In that regard, the early results were promising, he said: "We had over 1 million people joining the waitlist in the first couple of days."

Lay of the land

While Robinhood's no-fee model may make it an appealing alternative for many retail crypto investors, the competition is formidable, even in the very limited field of user-friendly onramps for consumers bewildered by most crypto exchanges.

When asked by CoinDesk who he considers his main competitors in the crypto-trading space to be, Tenev said it would be "any consumer-oriented company that allows people to trade cryptos or even just buy cryptos," specifically naming Coinbase as one of the "legacy guys."

On the one hand, Coinbase charges anywhere between 1.5 percent to 4 percent, depending on the user's payment method, location and other factors, plus a spread on the exchange rate. So, it might be vulnerable to a cut-rate rival such as Robinhood.

However, until recently Robinhood only allowed trading in the two largest cryptocurrencies by market capitalization, bitcoin and ethereum – though it just added litecoin and bitcoin cash – and it operates in just 17 U.S. states. Coinbase, on the other hand, offers a similar variety of choice (four cryptos, with a fifth in the works) and operates in nearly all 50 states and internationally with 20 million users, four times Robinhood's total user base.

The other competitor Tenev mentioned, Square's Cash App, only offers bitcoin purchases, but it does so in 47 states. Square does not charge a fee for this service, though it takes a spread on the exchange rate depending on the transaction size and market volatility. All told, Square Cash has 7 million users, who primarily use the app to send each other dollars.

Aside from costs, however, Robinhood also touts its ability to do all one's trading – stocks, options, ETFs and now crypto – in one place, and its capacity to handle large order volumes, a notorious shortcoming in the crypto exchange space where multi-day outages are not unheard of.

"We were able to sustain the customer orders," Tenev explained during the CBInsights conference speaking to the period in late January when several exchanges were down for days at a time.

Looking ahead

Moreover, Tenev said Robinhood is just getting started in crypto. Despite its current role as a sort of marketing funnel for his company's flagship brokerage, he has a grander vision for the young crypto business.

"This is a product that could also stand on its own and is valuable independent of the broader Robinhood ecosystem," he told CoinDesk, adding:

"We're passionate about cryptocurrency and we want to be stewards of the market and we're going to keep investing in it. We're going to be hiring lots and lots of people, building out the crypto team… So we're investing in it for the long haul."

Indeed, in a funding round last month, Robinhood raised $363 million to expand its cryptocurrency trading services beyond the states it currently services, in order to slowly but surely become "the largest or one of the largest crypto platforms out there," as the other co-CEO, Baiju Bhatt, put it in an interview with Fortune.

Robinhood Markets, the parent company to Robinhood Crypto, has other big ambitions as well; it has been reported to be in talks with regulators about advancing into the banking space.

Speaking with CoinDesk, Tenev also hinted at someday allowing initial coin offering (ICO) token trading on Robinhood, explaining there was "nothing in principle" that he would oppose about it and that in this event, ICO tokens would be treated "like any other tokens on our platform."

In the long run, Tenev said that when no-fee trading becomes the norm, both in crypto and in traditional investing, Robinhood will "have to figure out how to stay relevant and innovative as the market leader."

Of course, that's a bit of a humblebrag, considering that Robinhood is still a relatively new player, both to stock brokerage and especially crypto. Tenev's essentially predicting he'll become the kind of dominant incumbent his company now challenges, then "conceding" that position will be hard to defend.

He concluded:

"The competitors are going to be different five years from now, I pretty much guarantee it...Five years from now, it'll be us versus the startups."

David Floyd contributed reporting.

Image via CB Insights